CNY: Tolerance being tested? – HSBC

FXStreet (Delhi) – Research Team at HSBC, notes that the USD-CNY reference rate was raised again today and came in higher than the closing rate yesterday and what is different today, however, is that the PBoC appears to be capping the offshore USD-CNH rate.

Key Quotes

“In a CFETS statement, policymakers hinted at rising intolerance for speculative forces that are hindering with the price discovery process. In this context, intervention is not incongruous with the policy goal for currency flexibility, which was also strongly affirmed in the statement. High volatility will be the theme for 2016 as the RMB transits into a more flexible FX regime.

The USD-CNY reference rate was raised by 332pips to 6.5646, the largest move since the 11 August fixing reform. Moreover, it was once again much higher (70pips) than the closing rate in the onshore market yesterday (at 1630). This was an upside surprise, considering that the EUR appreciated overnight and the CFETS RMB index moderated by 0.27% by our estimates (see Chart).

Similar to the price action yesterday, the onshore USD-CNY spot rate was allowed to move higher at open, suggesting that FX policy is indeed more permissive of a weaker yuan. However, in an interesting departure from earlier periods, the PBoC appears to have intervened in the CNH market this morning, as reported by Bloomberg.

We do not believe narrowing the CNH-CNY basis is done out of consideration of the IMF SDR basket, as we have explained before. Rather, the authorities may want to cap USD-CNH now as it increasingly believes "speculative forces" are at play in the offshore market, leading to "abnormal fluctuations" and sending "misleading price signals", according to a CFETS statement released this morning (although dated 5 January). Indeed, according to Bloomberg this afternoon, the PBoC is considering new tools to contain speculative and/or fake trades, especially by foreign companies so as to prevent currency volatility from rising further.

While the PBoC will probably prefer to be "hands-off", overwhelming speculative forces would hinder with the price discovery process that it had likely intended to use the CNH market for. Intervention in this context is not incongruous to the PBoC's goal of a flexible currency regime. Such a behavior pattern - allowing the onshore spot to adjust faster, while capping the offshore USD-CNH at the same time - could be indicating the central bank is attempting to find a near-term market equilibrium level in USD-CNY that can help the onshore and offshore exchange rates converge. Although, we will still need to reassess its FX policy every day.”
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